Did the 2003 Tax Act Reduce the Cost of Equity Capital?

48 Pages Posted: 25 Jul 2006 Last revised: 30 Jun 2009

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Linda K. Krull

University of Oregon

Oliver Zhen Li

National University of Singapore (NUS)

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Abstract

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced shareholder level taxes on equity income. If shareholder level taxation is a component of cost of equity capital, then the cost of equity capital should decrease after the Tax Act. We find that the cost of equity capital decreases by 1.02% and that the decline is smaller for firms largely held by institutional investors to whom the tax rate reduction does not apply. These results suggest that the Tax Act lowered the cost of equity capital and add further evidence to the question of whether taxes impact valuation.

JEL Classification: G12, M41, H24, H25, G23

Suggested Citation

Dhaliwal, Dan S. and Krull, Linda K. and Li, Oliver Zhen, Did the 2003 Tax Act Reduce the Cost of Equity Capital?. Journal of Accounting & Economics (JAE), March 2007. Available at SSRN: https://ssrn.com/abstract=918225

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Linda K. Krull

University of Oregon ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States
541-346-3252 (Phone)

Oliver Zhen Li (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

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